MORNING BID – Volatility, or lack thereof

Apr 23, 2014 13:06 UTC

It was another disappointing night for those looking for heavy volatility out of those reporting earnings – the trio of biotech stocks many were looking at, Gilead, Illumina and Amgen, had varying results, but they didn’t show the kind of bounce that some people were expecting.

In after-hours action Illumina was moving around 7 percent, short of the 11 to 12 percent move the options market was looking for, and Gilead was up around 3 to 4 percent, less than the six percent gain that the options market had factored in. Following the disappointment among those betting on volatility post Netflix-earnings — and the stock still moved a lot, just nowhere near as much as expected — it raises questions about whether some investors might start to temper expectations when it comes to overall volatility, because putting down money on a big swing has been a bit of a loser so far.

The earnings season is young, of course, so there’s still time and lots of momentum stocks out there that can surprise on the upside or downside, so there’s lots to come. The most notable, of course, is Apple, due out after Wednesday’s close. Some positive analyst revision activity of late suggests that the company’s results could surprise on the upside, even if this quarter is generally a transition one for the most valuable U.S. company because it’s a time when it is gearing up for new products later in the year.
What will be notable to watch are the parade of results that lean on the snow as a crutch for an overall poor performance.

Embattled retailer bebe showed some of that with their warning on Tuesday. While weather may have had something to do with it, it’s more notable that the retailer has posted losses for six straight quarters and their EBIT margins are of course negative when lots of their peers are still doing relatively well – be it Ann Taylor, the Body Shop, L Group, or what-have-you.

The myopic expectation that companies will get away with saying the snow is the cause of all their problems is on a par with Olaf, the snowman from Frozen, and his optimistic expectations for what life would be like for a snowman in summer. (Let it go, folks. Let it go.)

Meanwhile, several sectors including industrials and transports are hitting all-time highs again. It appears to be only a matter of time before the S&P 500 rebounds to its all-time high and puts it in striking distance of moving past 1900, a sign of health in the economy even as there are concerns about China’s growth percolating within the likes of IBM’s report and next week’s US GDP figure isn’t going to come in all that great either.

Where’s the juice coming from? As Reuters correspondent Caroline Humer pointed out in a story overnight, for health care names it’s from M&A activity that culminated in the Valeant bid for Allergan, one that Mike O’Rourke of JonesTrading compared unfavorably to the MCI/WorldCom deal all those years ago that represented the apex (and the nadir, really) of the telecom M&A boom of the late 1990s.

Big-cap pharma has been left behind a bit when compared with biotech – the biotech names are up about 125 percent in the last two-plus years even with the recent selloff, while the pharma giants have gained about 55 percent. The thing is, the latter gain is still pretty solid, so there’s that.

MORNING BID – But I never could find…(sha na na na, sha na na na na)

Feb 7, 2014 14:05 UTC

An odd jobs report sets the tone for what’s likely to be another choppy day in the markets – stock futures plunged, briefly, after the Labor Department said nonfarm payrolls grew by just 113,000, but the household survey saw a drop (again) in the unemployment rate to 6.6 percent on a big gain in jobs in that survey. An odd decline of 29,000 in government payrolls offset the overall about-at-trend-but-let’s-not-kid-ourselves-about-this-being-awesome 140,000 or so gains in the private jobs market, so there’s a little bit to like, some to shake one’s head at, and still more to wonder about how many people didn’t get to work because their feet froze to the ground when they tried to get into their cars.

(More seriously on that point – the establishment survey doesn’t get some kind of massive job loss just because of a storm on a particular day of surveying, so it’s not as if a snowstorm destroys job growth, so let’s not overstate the weather issue here. It’s a factor, but don’t look for a revision to +300,000 or something.)

The activity in equity futures, however, seems to point to where we’ve been all along: jobs growth, factory activity and overall economic figures are just enough to put a brake on getting any kind of incipient rally and keeping the buyers less motivated right now, though the shallow correction we’ve seen so far appears to have hit a stopping point for the time being. Futures bottomed out around 1758 on the S&P E-Minis, a few points below the level the market had been sitting at before the downdraft that took futures to about 1730 for a few days. Stocks recovered from that level and now appear content to hang out around 1760 or so or even a bit higher, while the bond market is doing something similar – a quick post-jobs rally that took yields down to about 2.64 percent on the 10-year before the buyers eased off the throttle, lifting yields again to around 2.67 to 2.70 percent. Absent more emerging markets turmoil – and this appears to have been somewhat stemmed in the last few days, though maybe that’s just because we haven’t had bad news from China in the last day or two – these levels might end up prevailing for some time.

The jobs number of course raises the usual back-and-forth about whether the Fed might decide to accelerate or decelerate its schedule for winding down stimulus, but with the Federal Reserve – and especially with a new chair coming in – predictability when it comes to this policy is probably the preferred course of action. There’s enough weather-related shenanigans and uncertainty about global growth offsetting the relatively solid economic figures for the Fed to not want to jolt markets, and the Fedsters have been talking pretty tough on this one, essentially making it clear that this wind-down will become the equivalent of stock buyback programs: They continue, no matter what, unless something drastic happens to alter that expectation.

While we’re on the subject of buybacks, Apple is upping the ante on its own share repurchase schedule, succumbing to some of the pressure from the likes of Carl Icahn and others who have demanded the company boost shareholder returns in the absence of real spending plans. And of course, Apple has a ton of cash on hand, and they’re generating enormous profits even if they’re not the growth engine they had been in the past. It’s a bit early to say that the company should be lumped in with the likes of Exxon or IBM – gigantic businesses mostly notable now for moving money around, using up their free cash flow (and then some, thanks to low borrowing costs) for buying back their own shares.

Some analysts, notably Tobias Levkovich of Citigroup, have done studies that show that serial repurchasers – those who are steadily reducing their outstanding share count (share shrinkers, to come uncomfortably close to a Costanza-ism here) – have been better performers in the stock market over the last decade, with a total return of about 550 percent coming into the year compared with the S&P, which is up about 200 percent since the beginning of 2003. From a shareholder perspective, that works as long as these companies are so entrenched that their products deliver big sales at steady margins; once they fall behind, though, look out.

MORNING BID – Emerging Markets, Apple, Ma Bell, and whatever else one can think of

Jan 28, 2014 13:56 UTC

In the words of Inigo Montoya, let me explain. No, there is too much. Let me sum up.

The market’s most immediate issues remain tied specifically to what’s going on overseas, particularly in Turkey. There, monetary authorities are meeting on a potential interest rate hike as a way of getting on top of the inflation problem (inflation’s at 7.5 percent, and the central bank’s lending rate is, uh, 7.75 percent).

So that’s a problem: Inflation is running real hot, the lira is in free-fall, and as Reuters’ Mike Peacock in London points out, the consensus view for a rate hike puts it at about 10 percent for when the bank announces its decision at midnight Istanbul time, 5:00 p.m. Eastern time (1000 GMT). Will that be enough to put a floor under the lira? Perhaps.

Now, U.S. companies don’t exactly have a lot of exposure to Turkey, and in this emerging markets rout we’re in the midst of right now, there’s a real question as to whether we’ve reached that “contagion” level. Sure, everything is selling off, but that’s not quite the definition, and it will take a little bit more time and effort – that is, more wholesale selling, liquidation of positions across various countries – to really call this a contagious effort. There are worrisome signs on that front, though. An analysis by Reuters’ Sujata Rao-Coverley, Dan Bases and Vidya Ranganathan points out that the increased funding through publicly traded fixed-income markets rather than bank lending means these markets are more intertwined, leading to the possibility of more selloffs that feed on each other.

Emerging markets with big current account deficits.

Back in 1998, bank loans were the funding mechanism for lots of emerging countries. Furthermore, the sheer dollar volume now dwarfs what was out there in the 1998 Asian contagion that later saw the collapse of the ruble. EM bonds are now in the range of $10 trillion, versus $422 billion in 1993, per JP Morgan; funds benchmarked to EM have assets of $603 billion, more than double what existed in 1997. EM ETFs? About $300 billion now – compared with nothing in 2004. And let’s remember the main ETF for emerging markets – EEM is the symbol – which is routinely the second-most active ETF in the United States. Long-term investing this ain’t, and the flight exacerbates the worries.

After three days of selling, emerging markets have stabilized a bit on Tuesday, so that’s something. Again, these selloffs often combine magnitude and time, with the swiftness only one part of it – the sheer ongoing nature of it is the other part. But that doesn’t mean preparations aren’t in order: David Kotok of Cumberland Advisors said his firm is raising cash levels, noting volatility tends to spike in forex markets when central banks have held interest rates near zero for a long time (which they have).

The real watcher is likely China’s shadow banking system and the possibility of problems there. Banks have been selling massive amounts of exposure to investment trusts to individuals for some time with promises of big returns and using that money invested for lots of lending; one of those trusts distributed by ICBC had to be bailed out this week. If there’s more of that to come, it’s a real question of what’s going on with the banking system’s health there – and that again leads to some uncomfortable conclusions about growth in China, which is far worse a problem than any crisis in Turkey, given its sheer size and influence.

OPEN-APPLE-RESET
Meanwhile, on a domestic front, Apple’s earnings weren’t what was expected. Sure, the company exceeded revenue forecasts and earnings forecasts, but it fell short of expectations on iPhone sales by a lot, and nobody’s happy about this. The stock was hit hard in after-hours action, and was, of late, down about 6 percent. Of course, selling 51 million phones over a three-month period isn’t exactly shabby, and the company is still making money hand-over-fist.

The disappointment comes, in part, from the realization that Apple’s growth rates just aren’t what they used to be, and that Samsung is widening its global lead in the smartphone market, with one report putting its sales at 86 million phones in the quarter. Samsung, of course, is selling more low-end phones, so it’s not like Apple is getting its head handed to it here, but its market share is down to about 17.6 percent from 22 percent, according to Strategy Analytics.

Carl Icahn’s recent calls for the company to get more aggressive in giving money back to shareholders through a big buyback are going to probably only get louder. This raises the chances that the company doubles down on the financial engineering strategy of growing earnings that admittedly has helped the shareholders of names like IBM, AT&T and Exxon Mobil, but doesn’t speak well from the innovation front for a lot of these names.

The company – the most valuable in the United States – had been banking on a big deal in China to sell even more phones, but the market is starting to look saturated on that front, Pacific Crest analyst Andy Hargreaves told Reuters’ Bill Rigby. And Apple doesn’t have a game-changing product on the horizon either right now, so that means the investment thesis comes down to volume. It’ll keep making scores of money, but reduced market share and pretty new colors and bells and whistles won’t be enough when “hardware can only go in one direction, and that’s flat or down,” said Alex Gauna of JMP.

If Apple is headed in the direction of AT&T, it’s going to eventually turn into one of those companies where investors get excited about special factors pumping up earnings results, and AT&T’s going to have that today when it reports results. What’s going on here? Pension related stuff – the market’s gains mean companies with lots of pension assets can mark those positions to market (read: make them bigger). And where previous years of losses can hurt those positions for the likes of Verizon, Ma Bell and UPS, this year it’s a help.

Verizon’s adjustment boosted S&P 500 earnings per share by 42 cents this quarter, and AT&T could make just as big a splash this time around. So AT&T is expected to record a gain of about $7.6 billion in the fourth quarter as a result of this, which is massive. Now, David Randall wrote a story a few days ago noting that few fund managers buy a stock based on this sort of thing – AT&T’s primary business is, uh, selling telephones, no, wait, ah yes, telecommunications – so if the business stinks, never mind the pension stuff.

But it’s nice that the pension funds are fully funded or better now, just in time for a big market correction.

Optimism in Facebook options, with rebalancing at day’s end

Dec 20, 2013 15:06 UTC

Okay, the year *really* ends today, as the next two weeks will feature a market holiday and some real thin liquidity. Options activity was brisk on Thursday as investors dumped positions ahead of today’s quadruple-witch expiration of index futures and options.

One of the more interesting aspects of the trade today will involve Facebook, which is being added officially to the S&P 500 and therefore should have a big trade upon the close of action when the index funds will have to add the stock officially to their funds. Howard Silverblatt, S&P’s index analyst, puts the estimated share buy at about $10.5 billion (so it’s convenient that Mark Zuckerberg & Co are selling a 70-million-share secondary, much of which is going to go to index managers who need to make room by selling everything else).

Still, this buy is only a part of it, as the stock has been subject to significant upward pressure in recent weeks, thanks to emulators who try to mimic the index – or beat it by buying most of the index and then using call options or other structures to try to come out ahead of it. (Silverblatt says they’re index managers in all but name, because then, “I’d have to charge them a licensing fee.”)

It’s helped the stock – whose disastrous May 2012 IPO still stands as a black mark for Nasdaq OMX – which is now trading near all-time highs and has gotten past several months of underperformance that followed the ridiculous first day of trading. Shares have more than doubled this year and there’s been heavy activity in the options market as well, where Schaeffer’s Investment Research analyst Beth Gaston pointed out Thursday that 9 of the 10 most popular options contracts were in the front-month December contract.

The optimism has been increasing in the options world as well when it comes to these shares – its current put-to-call option interest ratio is higher than 89 percent of readings in the last year, implying expectations for more gains going forward.

Overall action is going to be mostly interesting at the close, as the market gets a big rebalancing with about $31 billion in share rebalancing for the S&P 500 index and smaller rebalancings for a number of other major averages. The biggest net buy for the S&P is, as said, Facebook – though Credit Suisse analysts note this morning that some of this has been now offset by the secondary offering. Other big net buy-on-close names are going to be General Motors ($1.05 billion), Alliance Data Systems ($464 million), while the net sales will be led by Apple ($739 million) and Pfizer ($532 million).

from Ben Walsh:

Apple > Goldman (in revenue and profit per employee)

Ben Walsh
Nov 1, 2013 18:28 UTC

Fortune's Philip Elmer-Dewitt finds an interesting chart in a research note from ISI's Brian Marshall. Apple is bringing in far, far more revenue per employee than other US tech companies.

Marshall's takeaway: "The scale [Apple] is executing on is nothing less than astonishing". And not only does Apple beat out its tech peers, it sits above the US banks in both revenue and profit per employee for the most recent four quarters.

Apple is generating more revenue and profit per employee than the biggest banks, companies that are at least partially set up to deliver eye-popping per employee financial performance. Marshall's statement applies more broadly than perhaps he intends. Apple's performance is indeed "nothing less than astonishing", and not just in comparison to tech companies.

Contributing in part to these impressive results is Apple’s ability to outsource large portions of its production and supply chain to places like Foxconn. While this is the norm for tech companies, there is no analogy on Wall Street to the legions of low-cost non-Apple workers who assemble the products that drive Apple's revenue and profit. To use consultant-speak, Wall Street scales and leverages its business model in very different ways.

Apple’s billions

Oct 29, 2013 22:19 UTC

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

Apple’s earnings came out yesterday, and the headline figures featured higher sales and lower margins, with reactions ranging from “meh” to generally pleased.

Benedict Evans of Evers Analysis tweeted a nice chart showing a longer-term view of Apple’s plateauing revenue and guidance. To Dan Frommer, Apple is missing something more ethereal:

Where Apple has disappointed recently is in novelty, or surprise. Perhaps this is unfair, but it’s real. Apple became the company that delivered “new”.  People got used to hearing about new stuff all the time — iPod nanos, iPhones, MacBook Airs, iPads — and now it seems like it’s been a while. The more people got, the more they wanted. And then you have to work even faster.

Apple had $37 billion in revenue last quarter, up from $36 billion this time last year and steadily growing iPhone sales, but it may be cursed by its own success, Will Oremus writes: “By carving out the juicy high end of every market, it has been able to kick back and enjoy fat profit margins while its competitors tussle for scraps.” Now, however, things are a bit different. Apple’s never had a lower average selling price for its iPhones and iPads, Ben Popper notes. “Last quarter saw a historic low of $581 in revenue per iPhone sold. This quarter, that figure slipped slightly lower, down to $577.”

There’s also the question of what Apple should do next, with or without its $147 billion cash hoard, which Moody’s earlier this month said accounts for 10% of all cash held by US nonfinancial companies. Oremus argues that Apple won’t have long before investors get antsy, while Felix writes that Apple should be bold enough to continue exactly what it’s doing. Carl Icahn has been been agitating for Apple to buy back $150 billion in stock, which would be financed with a mix of debt and cash.

Farhad Manjoo says that Apple should spend its cash on the future — buy a telecom company, or offer more free cloud storage, for example. “Like all tech companies,” he writes, Apple “is ephemeral. It is a giant perched atop an ever-shifting mountain of silicon, a behemoth whose success is as tenuous as it is fantastic.” Dennis Berman, in an entertaining debate with Manjoo, says that Apple could easily buy back $75 billion in stock and not damage its particularly capital efficient innovation engine.

Christopher Mims notes that there may be another quarter of monster growth coming for Apple: it only shipped its new line of iPhones for 10 days during this past quarter. At the risk of sounding like a “naive Cubs fan,” Dan Frommer argues that we should all just give Tim Cook another year. “For now, enjoy your new iPad, relax, and get excited.” — Ryan McCarthy

On to today’s links:

Unsolved Problems
60-40: the odds there won’t be a smooth resolution to the healthcare.gov debacle – Tyler Cowen

LIEBOR
Rabobank brags about rate-rigging: “I would never change libors without consulting you” – Financial Conduct Authority
Rabobank’s CEO resigns after agreeing to a $1 billion Liebor settlement – WSJ

JPMorgan
JPMorgan still isn’t sure what it bought in 2008 – Matt Levine
Inside the subprime loans that led to JPMorgan’s $13 billion settlement – Al Yoon

Primary Sources
Home prices up 12.8% over last year – Case-Shiller

Popular Myths
A strong currency isn’t always a good thing, euro edition – Neil Irwin

Rants
10 things I hate about lists (#7 is the best) – John McIntyre

Data Points
Historical prices in Jordan XI’s – Melvin Backman

Oxpeckers
Actual blogger job listing: “if there is need for plagiarism, then so be it” – oDesk

Cephalopods
Goldman to junior bankers: go ahead, take the weekend off – Michael Moore

Follow Counterparties on Twitter. And, of course, there are many more links at Counterparties.

  • # Editors & Key Contributors